Soaring Edible Oil Prices Deal Blow to India’s Inflation Fight

The soaring cost of vegetable oils is an ever-growing threat to India’s efforts to bring inflation under control.

Prices of palm oil, the most-consumed edible oil in the world, have jumped 20% this year to a record, while rival soybean oil has gained 17%, contributing to a surge in global food inflation to near all-time highs.

The rally is putting a strain on India, the top buyer of palm, soybean and sunflower oils. Consumer food prices rose in December at the fastest pace in six months, squeezing household budgets and increasing pressure on Prime Minister Narendra Modi’s government which already provides food aid to 800 million people, or two-thirds of the population.

The central government has taken steps to cool prices, including reducing import duties on palm, soybean oil and sunflower oil, and limiting inventories to prevent hoarding. Success has been muted because India’s moves stoked expectations of higher purchases, which further boosted international prices.

India has limited options in the near term. Any further reduction in import duties won’t ease prices, said veteran trader Dorab Mistry, a director at Godrej International Ltd. The immediate solution is to import refined palm oil and sell through its public distribution system (PDS) at below market value, he said.

A rise in global rates caused domestic edible oils to surge last year, but the federal government managed to bring down prices through several measures, including duty rationalization, he said. India is working on medium- to long-term plans to cut its dependence on imported edible oils, he added.

Longer-term options for the government include building up reserves, boosting domestic production and allowing commercial cultivation of genetically modified (GMO) oilseed crops, according to traders and analysts.

State Reserves

India should build an edible oil reserve to insulate from any price spikes, said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental. This will allow the government to release supply in times of shortage, to soften prices and to curb speculation trading and hoarding.

This would be similar to what China does with its massive stockpiles of crude oil, strategic metals and farm goods, according to Thiagarajan. Beijing doesn’t publicly publish information about the volumes it holds in its state reserves, but may release commodities in emergencies.

India’s food stockpile is focused on grains like wheat and rice, which the country produces in abundance. It hasn’t been able to replicate that with edible oils as India relies on imports for 60% of its needs.

Boost Production

India is trying to boost domestic production to overcome its dependence on imports. The government launched a $1.5 billion initiative called the National Mission on Edible Oils-Oil Palm last year to improve self-sufficiency.

More land should also be diverted to grow soybeans, sunflower and rapeseed crops, said B.V. Mehta, executive director of the Solvent Extractors’ Association of India. The government will need to spend 50 billion rupees ($668 million) a year to boost oilseed output, he said.

For this to happen, farmers will need to shift away from growing wheat and rice, where they’re guaranteed a minimum price for their crops, the industry group said. It has pushed for a higher support price for oilseeds so that more farmers can be drawn toward oilseed cultivation.

Finance Minister Nirmala Sitharaman said in her recent budget speech that the government is working on a plan to boost oilseed production. The spokesman for the food ministry said various ministries and departments are involved in ensuring food security and crop diversification.

GMO Crops

The country may eventually have to turn to genetically-modified rapeseed, popularly known as mustard in India, to help boost overall oilseed output, Mistry said. Mustard oil accounts for more than 10% of India’s annual cooking oil needs of 22.5 million tons.

The government is not currently planning to promote GMO mustard, the food ministry’s spokesman said.

Bloomberg

Tags: palm oil, edible oil, sunflower oil, sunflower, soybean oil, soybean, India, rapeseed